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The Basics of Trade Secrets

Your confidential and proprietary business, financial and technical information forms the trade secrets of your business. Secret technology, secret recipes, secret processes, and secret customer data can all constitute trade secrets in particular circumstances.

Defining Trade Secrets

As trade secrets are comprised of secret information, there is no formal registry or government documentation of trade secrets in Canada. Instead, in various circumstances, trade secrets can include almost any piece of valuable and technical business information if it is secret and if the holder of the secret has taken all reasonable measures to keep it secret.

For the most part, the Canadian trade secret regime is based on court-made law, which is also known as common law, although the Security of Information Act does address the fraudulent theft of trade secrets for the benefit of a foreign economic entity.

Canadian common law on trade secrets generally focuses on the unfulfilled duties owed by the parties stealing trade secrets to the parties from who they have stolen and on the wrongful actions of parties receiving stolen trade secrets, rather than on the 'property' nature of the information taken or the criminal nature of a 'theft'. However, in practice, trade secrets are often treated as property assets in much the way patents or trademarks are treated; for example, they can be sold, licensed, bequeathed, and can be the subject of a trust.

Comparing Patent and Trade Secret Protection

Where a trade secret is made public it generally ceases to be a trade secret and can be freely used by all. This is true whether it is made public as a result of independent creation by another, some act of the owner of the trade secret, or some wrongful action of an involved party. Where a court determines the existence of a wrongful action, compensation is often set at a level which could be understood to put the owner back in the position they would have been in if the wrongful act had not occurred. In many cases, secret processes and methods which may constitute trade secrets could also qualify for patent protection.

Patent protection, on the other hand, is a definite property protection granted in exchange for the public disclosure of information. Patents are time-limited and only granted if an invention meets criteria including novelty and inventiveness, while trade secrets can be maintained indefinitely if kept secret and do not necessary need to meet a standard of novelty.

Costs are associated with obtaining and maintaining both patent and trade secret rights. To obtain patent rights an owner of an invention must prepare and file an application, respond to any objections or notifications from the patent office, and pay periodic maintenance fees. To maintain trade secret protection, an owner must put in place systems, such as systems of contracts, to protect the secrecy of their trade secret and educate their employees and partners about obligations and expectations.

Patents and trade secrets are also valued differently and provide different benefits. Patent rights are a set of time-limited rights that are assumed to be valid and give the owner the ability to seek compensation for infringement, the amount of compensation often calculated on the basis of damages suffered or the amount of profit made by an infringer. Trade secrets are not limited by a predetermined amount of time, but violation of trade secrets rights is typically valued on the 'but for' analysis mentioned above and not considered the theft of property.

In determining which protection route or scheme is best, an owner of a set of potentially valuable information must consider such factors as:

  • whether that information would be eligible for patent protection;
  • the relative value of the information as a patent versus as a trade secret;
  • the length of time in which exclusive use of the information would be beneficial; and, most importantly,
  • whether the information can practically be kept secret.

Maintaining Secrecy

Maintaining the secrecy of trade secrets is essential. How you maintain the secrecy will likely depend on the type of information, whether it is needed on a day-to-day basis in your business, and how many people need to have access to it.

Broadly speaking, all employees and partners who will have access to the trade secrets should be made aware of the fact that this information is considered a trade secret, made aware of what steps they are expected to take to protect the confidential nature of the information, and asked to sign a contract agreeing to maintain the secret before being allowed access. An important distinction is to be made between the confidential information an employee or partner obtains and the skills or experience that such people pick up over time. While the misuse of confidential information may be a breach of an obligation, use of experience or skills is likely to be considered legally acceptable.

Other steps to take include securing any physical or electronic facilities in which the trade secrets will be available or being used, marking documents as confidential if they contain the secret, and taking appropriate steps to secure electronic copies of the information.

Legal Protection for Trade Secrets

As mentioned above, the Canadian trade secret regime is largely a common law regime. As a result, there is no statutory definition of factors which will be considered in determining whether something is a trade secret, whether an action involves the misuse of a trade secret, and how to compensate an owner of a trade secret for its misuse.

Factors which have been considered by the courts include:

  • the extent to which the secret adds to existing industry knowledge;
  • the measures which had been taken to maintain secrecy;
  • the value of the information;
  • the cost in money or time of creating or developing the information;
  • the ease with which the information could be acquired or developed by others independently;
  • the degree to which the owner regards and treats the information as confidential;
  • the degree to which the recipient regards and treats the information as confidential;
  • whether the recipient ought to have known that the information was confidential; and
  • whether misuse of the information resulted in detriment to the owner.

Remedies for misuse of trade secrets could include court orders that the information no longer be used, compensation for lost opportunities, or other compensation. It should be noted that a delay in seeking to stop a misuser of a trade secret could result in some remedies not being available.

Conclusion

Deciding how to protect a market advantage which is based on certain information is often an exercise in choosing between patent and trade secret protection. If you have chosen to protect your information as a trade secret, a number of steps should be taken to maintain the secrecy of your information. If you believe that your secret has been misused, it is often important to act in a timely manner.